IPOs craze: Getting jiggy with it

Johan MundatJul 2, 2007, 12.22am IST

Initial public offers (IPOs) have been the biggest craze for retail investors in recent times. Not surprising, given the phenomenal returns that they have managed. The huge 100%-plus premiums on listing have put even the best fund managers to shame.

Close to 24 issues during the past one year have outperformed the market and nearly half of all the issues that came in the past one year are still trading above their issue prices.

The question now on every investor's mind is: "Do I hold on or do I cash out?" As always, trust ET Investor's Guide to step in when in doubt, as we guide you on how to ensure that you continue being both a profitable, as well as a prudent investor. We think that it is time for IPO-intensive portfolios to be rebalanced.

The rebalancing is necessary, given the greater clarity on many of the projects that these IPOs were intended to fund. Also, over the past year, many of these stocks have seen a re-rating, thereby altering the view that investors should now take on these stocks. Some of these companies are now trading at levels which are at the higher end of their peer group and not necessarily the best either.

While ET Investor's Guidesaw value in many of these at the time of issue, we think it's time to cash in. Similarly, there are others which, given the discount to issue price, are now starting to look extremely attractive.

A few like Cairn have seen a change in their business environment. For example, ET Investor's Guide was not enthusiastic at the time of Cairn's IPO, given the lack of clarity on how the crude would be evacuated. However, today a greater conviction and visibility has emerged on the same and so, we believe it's time to accumulate.

Others like ICRA have seen a complete reversal in fortunes, while our recommendation was mainly on account of the valuation discount to Crisil. This has changed post-listing, with Crisil now trading at a discount. Similarly, others like GVK and GMR Infrastructure have seen a big change in their fortunes, with the market starting to realise the potential of airports, which was never really there at the time of the issue. So, how exactly do you go about recasting your IPO portfolio? ET Investor's Guide gives you a headstart.

Goodbye

GMR Infrastructure: ET Investor's Guide was positive on the stock, given the company's two airport projects at Delhi and Hyderabad. Since then, the stock has seen a considerable rally, moving up nearly six times, mainly on the real estate assets that the company would have access to through the two airport projects. Investors invested in the IPO can consider booking profits in the counter, with the current prices more than reflecting the value of the real estate assets. Moreover, bottomline contributions from both the airport projects are not expected to flow in till FY09.

Development Credit Bank: This has been among the best performers among all our IPO recommendations, rewarding investors with close to four times their invested capital. Given the strong run that the scrip has seen, we believe that further upsides in the scrip are limited. Valuations, too, are at the upper band of peer group stocks at close to 5.5x FY07 book — banks that trade at comparable multiples include HDFC Bank. Investors may consider booking gains and moving to UTI Bank or ICICI Bank in the private banking space.

ICRA: ICRA has been largely a beneficiary of the booming financial services industry and the positive environment for ratings services. ET Investor's Guide recommendation was based on the discount multiple of the issue price to Crisil — the largest rating agency in India. Since its listing and the strong run on the bourses, this has now reversed. Crisil is today trading at a significant discount to ICRA, notwithstanding its larger size. IPO investors can book full or partial profits and can consider Crisil, given its larger size and multiple revenue streams for rating company exposures.

Sobha Developers: Sobha was among the first real estate companies to tap the equity market. Sobha largely benefited from the scarcity premium for real estate companies.This has changed substantially since then, with a slew of companies raising money through the equity route. This is also partly responsible for the stock's moderate performance, driven by higher equity supply and rising interest rates. Moreover, Sobha's projects are concentrated in Bangalore where prices are more vulnerable to a fall because of higher supply.

Hello

Technocraft Industries: ET Investor's Guide was bullish on this counter, mainly given its strong position in the industries that it operates.These include scaffolding equipment, storage drum equipment for petrochemicals. The stock is currently available at close to one-time sales and a P/E of 12.5x. Exports comprise nearly 95% of the company's sales and the stock is now trading at a 22% discount to its offer price.